Investing in small- and mid-cap stocks is riskier and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the portfolio invests may never be recognized by the broader market. Investing in equity stocks is risky and subject to the volatility of the markets. Ariel Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors and its performance may suffer if these sectors underperform the overall stock market.

Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the period ended June 30, 2014, the average annual total returns of Ariel Fund (Investor Class) for the 1-, 5- and 10-year periods were +29.50%, +24.25% and +7.54%, respectively. Ariel Fund’s Investor Class shares had an annual expense ratio of 1.03% for the year ended September 30, 2013. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our website, arielinvestments.com.Investing in small- and mid-cap stocks is riskier and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the portfolio invests may never be recognized by the broader market. Investing in equity stocks is risky and subject to the volatility of the markets. Ariel Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors and its performance may suffer if these sectors underperform the overall stock market.

After a slow start to the year, global equities accelerated in the second quarter of 2014. For the quarter, domestic large caps edged out mid caps and foreign equities—with small caps posting a solid but less dramatic quarterly gain. The pattern from the first quarter continued: a preference for yield-bearing investments and equities with a reputation for steadiness and fundamental strength. For instance, across Russell’s main smaller-cap value indexes (2000, 2500 and Midcap), the two top-performing sectors were utilities and energy. Along the same lines, in smallercap stocks value topped core, while growth underperformed. The pattern was not as pronounced abroad, where emerging markets stocks outpaced developed markets—with sagging China being a key exception. We had strong returns this quarter, as Ariel Fund gained +6.42%, beating the Russell 2500 Value Index’s +4.20% advance, as well as the +2.38% rise of the Russell 2000 Value Index.

Several of our holdings posted strong returns this quarter. Industrial sand producer U.S. Silica Holdings, Inc. (SLCA) piled up a +45.60% return after a great earnings report. Recent results were solid, but the key takeaway from management’s comments was the comparison of the current environment to that of 2011 and 2012, when business boomed based on heavy demand. All along, we have viewed Silica as a cyclical business, so we expected it to improve along the way; by the same token, we do not think a great environment will persist forever. In addition, global real estate company CBRE Group, Inc. (CBG) jumped +16.81% after a very strong quarterly earnings report. Its adjusted earnings per share were $0.25, $0.08 higher than expectations, on the basis of strong revenue overall and nearly across its units. The market seemed especially pleased that management saw more upside than downside for the rest of 2014.

A few of our holdings struggled throughout the quarter. Preclinical testing firm Charles River Laboratories Intl, Inc. (CRL) dropped –11.30% as mergers and acquisitions ramped up in the health-care sector. Health-care consolidations have been rising, the most prominent being a proposed $100 billion acquisition of Astra-Zeneca by Pfizer Inc. (PFE), and with mergers come the rationalization of research capabilities. The market tends to react swiftly and sharply to such events. We think such reactions are generally overblown, as the effects tend to be more short-term than long-term; as such we think Charles River has become a better bargain lately. Also, natural resources explorer Contango Oil & Gas Co. (MCF) slipped –11.37% after an earnings report that disappointed the Street. Specifically, the company’s first-quarter loss of $10 million was driven by $42 million in dry-hole (a well that produces no

commercially viable oil and gas) costs from a Gulf of Mexico well. Investors focused heavily on that unfortunate news—which we see as an unlucky part of the business— rather than on the company’s otherwise solid numbers. We were quite encouraged that the company plans to shift its capital expenditures entirely onshore where dry-hole risks are much lower.

In the second quarter of 2014 we did not initiate any positions in Ariel Fund, but we sold our shares of DeVry Education Group Inc. (DV), Interface, Inc. (TILE), McCormick & Co., Inc. (MKC), and Nordstrom, Inc. (JWN) in order to pursue more compelling opportunities.

At the end of the first quarter we publicly surmised that we had just seen a slight pullback in the market. This quarter the market got back on course, and we think the rest of the year may well be more of the same, for several reasons. First and foremost, the long-awaited—and in our mind overdue—wave of mergers and acquisitions is clearly in place. According to Goldman Sachs Group, Inc. (GS), 2014 is on pace to be the second-biggest year ever for M&A. Housing news has been positive: as noted in the Wall Street Journal, in May sales of new homes rose to their highest level in six years, and sales of existing homes jumped a seasonally adjusted +4.9%. Finally, the Wall Street Journal notes, “U.S. payrolls in May hit an all-time high after the first four-month stretch of job creation above 200,000 since the boom days of the late 1990s.”1 We think corporate transactions, housing and employment are huge forces in the economy that should serve to accelerate the ongoing recovery.

This commentary candidly discusses a number of individual companies. These opinions are current as of the date of this commentary but are subject to change. The information provided in this commentary does not provide information reasonably sufficient upon which to base an 1 Eric Morath, “Jobs Return to Peak, but Quality Lags,” Wall Street Journal, June 9, 2014.

investment decision and should not be considered a recommendation to purchase or sell any particular security. As of 6/30/14, U.S. Silica Holdings, Inc. constituted 1.7% of Ariel Fund; CBRE Group, Inc. 3.9%; Charles River Laboratories Intl, Inc. 2.5%; Pfizer Inc. 0.0%; Contango Oil & Gas Co. 2.2%; DeVry Education Group Inc. 0.0%; Interface, Inc. 0.0%; McCormick & Co., Inc. 0.0%; Nordstrom, Inc. 0.0%; and Goldman Sachs Group, Inc. 0.0%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Fund.

The Russell 2500™ Value Index measures the performance of the small- to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price/book ratios and lower forecasted growth values. The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price/book ratios and lower forecasted growth values. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current prospectus or summary prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435 or visit our website, arielinvestments.com. Please read the prospectus or summary prospectus carefully before investing. Distributed by Ariel Distributors LLC, a wholly owned subsidiary of Ariel Investments LLC.

Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC.
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